Sunday, August 30, 2009

Past, Present, and Future

 People can be crippled by past.  For some folks, suffering from PTSD, this can be difficult to overcome.   But for most of us, our past traumas are not nearly so dramatic.  Yet many fail to move on and live productive lives.

"you gotta let go of the past, Bubs" --from The Wire

We are often told that we should live for today - live for the moment, instead of obsessing about the past or planning for the future. And living for today, for the most part, is good advice. If you can take advantage of what is going on in the here and now, you can live life more fully, and moreover, live your life more effectively.

However, oftentimes, we get so caught up in the past - or the future - that we fail to experience the present. What do I mean by this? Well, let me explain.

Living in the Past

A friend of mine has trouble sleeping. He tells me that every night he wakes up with things running through his brain- incidents or things that happened days, moths, years, or even decades ago.

"Stupid Brain!" he says, "Cut it out! I'm trying to sleep!"

His experience is not atypical, and I suspect that some wiring in our brain causes us to do this - perhaps to program our Neural Network to learn from such experiences. It takes an active effort to not obsess about past actions and worry about what was said or done years ago. And as one gets older, the number of experiences accumulate, so you have more and more to obsess about. My friend is 74, so he has a lot of experiences to ricochet around in his brain. Forgetfulness is a blessing, not a curse.

For some folks, however, obsessing about the past can be a crippling disability, not merely something that occasionally causes you to lose sleep. Many folks simply can't move beyond their childhood (See, The Parent Trap) or High School, College, a previous relationship, or whatever. They tend to view their lives through the lens of the past, instead of enjoying what is happening today. And if bad things happened in the past, well, it is nearly impossible to enjoy the today.

In the quote above, from The Wire (Which, by the way, is another one of those mildly amusing soap operas from HBO, whose mystique is quickly pierced if the episodes are watched one after another on DVD as opposed to weekly installments) one of the main characters "Bubbles" has a lot of past to deal with - post traumatic stress disorder from the Gulf War, as well as inadvertently killing his best friend through a drug overdose.

Those are hard things to bounce back from, and one can understand why someone with such baggage has trouble "moving on" with their lives.

But for most folks "stuck in the past", their traumas were far less dramatic - dealing with neglectful parents, or bullies in school. You can move on from a typical suburban middle-class childhood. It wasn't that traumatic.

And yet many have trouble doing just that. As I noted in a previous article, my late Sister spent much of her short life trying to "make sense" of her relationship with her parents, and in particular, our Mother. She never achieved that closure, I think, which is a shame. She spent countless hours reading books on the subject, boring to death anyone within earshot about it, and talking to counselors about it.

There was not much to "make sense" of. Mom was a drunk, mentally ill, and struggling to deal with her own sexual identity. However, we lived a typical suburban upper-middle-class lifestyle, and were well-fed and well-educated. By global standards, we were incredibly lucky. Get over it. Move on.

But my Sister's example is not atypical, and this sort of thing seems to afflict women more than men. Brooding over things long done and said is of little use. Moreover, being morose today over something that happened 20 years ago does little other than to destroy the today. If you feel you have been victimized in the past, letting it ruin your life now only lets the victimizer win again.

This is not to say that there is nothing to be gained from introspection or reminiscence. We learn from our mistakes, and the more mistakes we make, the more we learn. It is very important to review things we did in the past and learn from them, lest we make the same mistakes over and over again.

But obsessing about things that happened and trying to "understand" them or worry about them or feel bad about them is an utter waste of time. Trying to re-live the past in a fantasy world, is even less constructive.

In Normal Mailer's debut novel The Naked and the Dead, he describes this type re-living fantasy as the most common and concludes that it is a dead end. It was startling to read this comment, as I thought I was the only one who spent (wasted) countless hours thinking, "If only I had...."

And it is a pointless exercise. If only I had taken a different job, or went to a different school, or whatever. "If only I knew then what I know now!" is a common refrain. If only I had bought Microsoft in 1980! Hey, while we're at it, might as well have bought all those winning lottery tickets too!

Regardless of how you view the space-time manifold, the hard truth is, you can't relive the past and re-thinking the past doesn't change it. Spending time re-living your past life and wondering what you could have done only serves to further squander your present - and your future.

Learn from the past - and then move on. Let it go. You can't unbark the dog. It is not an adiabatic reversible process. Time moves as a vector, in one direction, at least for us mortals.

Note also that living in the past can be just as crippling, if not more so, for people who have fond memories of their past. In the Bruce Springsteen song, "Glory Days" he describes how people from his High School have struggled to move beyond their glory teenage years. Middle-aged friends, after they have a few beers in them, do nothing but reminisce about how great high school was, when they were kings of the hallways and the athletic fields.

One can understand why they do this. Their "glory days" of high school were so much better than their mundane middle-class lifestyle of middle age. In High School, they were Gods. As adults, they are just another schmuck, and no one cares whether they broke the School's all time passing record in 1975. Moving on for such folks is doubly difficult, as they have little to move on to. There is no present or future than can surpass their past.

This should be good news, however, for the bulk of us, for whom high school was a total drag. At least we didn't peak too early and have much to look forward to. The only way you can short-circuit your own happiness is to obsess about your own past, and not enjoy the present and future you have.

Living in the Present

"I never look back, darling.  It detracts from the Now."  - Edna Mode.

Being a kid was great. I remember being about 6-8 years old as some of the best times of my life. It was that age when self-consciousness was just occurring, and there was little to do except enjoy life and not worry about the past or future.

As a kid, you have little or no past memories to worry about. You cannot stay awake at night and worry about things from 20 years ago, because frankly, you can't remember very clearly more than a year back. And kids seem to take disappointment in stride, rapidly forgetting any minor incidents or episodes with ease.

If you watch kids play, you can see this plainly. "Let's be friends!" one says. "OK," says the other - it is simple as that. Let's enjoy the moment for what it is without worrying about the future or the past.

And the future - that seems pretty far off and irrelevant. I remember as a child, learning about death for the first time. I was bitterly disappointed. You mean this doesn't just go on forever? Well, no.

But then my parents explained to me that, with any luck, I would live to be 60, 70, or 80 years old, which was further that I could count at the time. So why worry about it? 70 years might as well be an eternity at that age. A child has few worries about the past - or the future.

Unfortunately, as we get older, we lose this child-like capability to live for the moment. To some extent, this is because we do have to plan for the future and learn from the past, and these experiences try to crowd out the Now. It takes mental effort to filter out these annoyances and reduce them to their respective places, if you want to enjoy the present for what it is.

Fear and Worry seem to dominate the minds of many adults. As youth, we have no cares, no possessions, no retirement plan. And we have no worries. As adults, we want to secure our position - make sure we keep what we have, and plan for the future. As a result, many of us worry too much - or are afraid. And such emotions can be both physically and emotionally draining. You can literally worry yourself to death.

Living in the Future

"When a Man Makes Plans, God Laughs" - Old Yiddish Proverb

Planning for the future is important to your life. I am not suggesting that you go through life, hoping everything works out, without making any plans whatsoever. We all have to plan, to some extant, whether it is how to pay the mortgage next month, or what to have for dinner tomorrow.

And it is also important to make long-range plans - for retirement, for your long-term care and support, and for the care and education of your children.

But for many folks, these plans can end up dominating their lives, and end up making their lives less enjoyable.

Plans are just that - ideas for the future, not a blueprint or road map. Plans change over time - and should - to accommodate new circumstances.

Perhaps this is an effect of Western Culture that we make these ironclad plans and expect ourselves to stick to them. Contract law, as evolved in Europe and particularly in England, allowed little or no room for change over time. If you signed a contract and the terms later turned out to be so unfavorable that you went broke, well, that was too bad. Off to the poorhouse or debtor's prison with you, where you would likely die. Perhaps you might have some recourse in Chancery (Equity) courts, but that was about it.

Today, Western law follows the same course. You sign a contract, and that's it. No wiggle room later on, unless you can threaten the other party somehow.

When dealing with other cultures, it is startling to notice the difference in attitudes toward contracts. The different cultural values often result in horrible misunderstandings. In many Middle Eastern and Eastern cultures, a contract is just a plan, not a guarantee. If conditions change such that one party cannot perform without going insolvent, then of course the contract is up for renegotiation. Why would someone be expected to perform on a contract to the point of extinction? It makes no sense.

In a similar manner, it makes no sense to obsess about plans for the future or to get upset when they go horribly wrong. Nine times out of Ten, you can expect plans to go horribly wrong. When the stock market recently tanked, many folks acted surprised, as their retirement plans were based on the market continuing to climb at a given rate. But if you look at the record historically, one should expect that there will be periodic "adjustments" not in your favor.

And since you cannot control such adjustments or the timing of such adjustments, as you get older you should put your money into safer and safer investment - and diversify. But even then, there is no guarantee that your plan will come to fruition.

Following the plan is often a recipe for disaster. Conditions change and plans should change accordingly. If you look at the history of major decisive battles, it is often the General who changes his plans in mid-stream who ends up winning. As conditions change, he takes advantages of these changes or opportunities and uses them to strategic advantage. The General who "follows the plan" - drawn up days or weeks ahead of battle - often ends up sending his troops into a mass slaughter.

My Father used to say that in order to succeed in life you can't be a "Quitter" but instead should "stick it out" and "finish what you started". My Father was an idiot and never even followed his own advice (on average, he changed jobs every 5 years, quitting several times and never "finishing what he started"). Unfortunately, many parents give such bad and crippling advice.

If you are a college student and don't like what you are studying or your school, then by all means, change your major, take a leave of absence, withdraw from school, or whatever. Finishing a degree you have no use for (and incurring tens of thousands of dollars in student debt) makes no sense. And it makes less sense to get depressed, drop out, and end up with low grades on your average.

It makes no sense to stay at a dead-end job and end up getting laid off. If you are depressed about your life and job, it is your brain telling you to change things. Change your plans for the future and ditch the old ones. Move on. Live in the present.

WORRYING about the future is probably even more crippling than over-planning or trying to follow old plans. We all make plans for the future, but sometimes these plans can get out of hand. We also tend to obsess and worry about things that haven't happened yet, or might not happen.

Just as the brain sometimes tortures us late at night about things that happened in the past, sometimes an overactive brain will torment us with "What ifs" about the future. Suppose we have company over next month and I say the wrong thing? Or Suppose this or that happens to our finances and then what do we do? The list goes on and on.

And when you step back and think about it, it is ridiculous. Your brain is worrying about what could happen, possibly, maybe, in the future, if such-and-such happened than some other string of improbable events was triggered. "Stupid Brain!"

To some extent, this sort of behavior in our brain, like dreaming, serves a function. By working out combination's and permutations of possible future events, we can take precautions and prevent such events from happening. But when worrying or fear takes over the mind, it can cripple a person and prevent them from enjoying the hear and now - which as we know is the only place we can live. "Tomorrow never comes" as they say, and it is true.

Living in the future manifests itself in a number of other behaviors as well. I remember in the 1990's these 8-mm camcorders became very popular. I bought one, and like anyone from that era, started making annoying videos that no one ever watched. While viewing the world through the camcorder lens, one realized that one was not experiencing the here and now, but rather framing events for a memory to be enjoyed later. It was not until days, weeks, or months later when I watched these videos, that I actually "experienced" the event. Viewing the Grand Canyon through a camcorder lens is not experiencing it.

The camcorder broke, eventually, and I never replaced it. I started taking digital pictures for a while, but then largely gave up on that. Taking the occasional picture is fun, but when any experience becomes a string of successive (and largely pointless) pictures, the cameraman is no longer living in the present, but thinking of the future download and posting of the photos.

Nowadays, when I go somewhere, I usually forget to bring the camera, and it is no big deal. I enjoy the experience for what it is, at the time, and forget about trying to record it for some unknown posterity.

While driving into town the other day, I realized that aggressive driving is another example of living in the future. In Central New York, a depressed area, people tend to drive aggressively and tailgate excessively - often in the worst sort of run-down cars. Even if you are doing the speed limit, someone will ride your bumper as if to say "Come on, enough already, I want to GET THERE!"

And that is just the point. In their minds, they are already at their destination. The trivial act of traveling from point A to point B is just some mundane repetitive task that should be disposed of as quickly as possible. They are already thinking about what they will be doing once they reach their destination and are not living in the now.

And, as you might expect, they get in a lot of car accidents, not just from tailgating or speeding, either. They are often not thinking about their immediate surroundings, but rather of where they are going. So they don't see the deer by the side of the road, or the child crossing the intersection, or the stop sign dead ahead.

Commuting is hardly an enjoyable experience, and most people anesthetize themselves with talk radio, cell phones, or their iPod to remove themselves from the immediate experience. Rather than change the experience (change jobs, move closer to work) they chose to merely blank out an unpleasant aspect of their lives.

And unfortunately, this blanking effect allows them to commute for longer and longer distances. In the D.C. area, I knew folks who would drive an hour or two in each direction, each day, so they could live "in the country" in a vinyl-clad mini-mansion next door to an identical vinyl-clad mini-mansion. They would argue that it was "worthwhile" making such an arduous commute so that on the weekend they could enjoy living in the country.

Such an argument was future-living at its worst. They endured a horrible commute in the "now" so that they could enjoy a "weekend in the country" in the future. Unfortunately, these lovely weekends often amounted to little more than mowing the lawn and visiting big-box stores. And once trapped in these scenarios, few tried to change their plight, as to give up on the "dream house" would be "quitting".

When the market for such homes collapsed, a funny thing happened. Many folks, after getting over the initial shock, actually felt liberated. Unable to change their present circumstances, the shattering of their future dreams forced their hands. They realized that the future they were living for was forcing them to live in an unpleasant present.

Procrastination is probably another example of living in the future and also an example of how damaging living in the future can be. It is all too easy to put things off until tomorrow. We have work to do, but feel listless and lethargic. "I'll do it tomorrow," we say, "and enjoy this glass of beer today!"

But the end result is that procrastination merely makes one feel worse about the future, increasing worry and stress. As a student, I was a horrible procrastinator, and spent more energy worrying about reports and schoolwork due than actually doing the work. Projects that seemed too large would be put off for some later time, when (in my fantasy) I would quickly complete them.

A better approach is to live in the present. If a project seems to daunting, then break it up into manageable chunks - what can be done TODAY, rather than the entire project. If you view a project as a single item, then you will inevitably be disappointed when it is impossible to finish NOW.

Instead, look at a project as a series of tasks, and think about what, realistically can be performed today. That way, "success" in a task is easier to achieve, as you can succeed in a sub-task on any given day.

For example, I am in the process of finishing off an unfinished basement room -a task I have been putting off for four years. The overall project seemed easy at first, "throw up some sheet rock and paint it" as they say. But the actual task comprises a dozen or more sub-tasks, each of which can easily take a day or more.

What got the project going was to try to do a little each day, rather than a whole lot at once. Cleaning out the space took a whole day in and of itself. Just moving tools in place and setting up a workspace another. Rewiring electrical outlets turned out to be a multi-day job. And insulating the bar 2x4's another.

"Throwing up the sheet rock" in retrospect, is the easiest part of the job. The harder parts are getting the walls ready to throw it onto.

But what really became paralyzing was planning the space. Should we put a fireplace in there? And if so, what kind, gas or wood? What about cabinets? Endless discussion ensued, and we found ourselves thinking of possibilities based on possibilities and what-ifs and "wouldn't it be nice if.." Not a lot of work got done, but we were still exhausted.

Finally, we realized that the best thing to do was to figure out what was affordable this year, and what could be done on this day, and to leave our options open for the future. Suddenly, work actually got done on this project.

Living in the present allows you to be more productive. Worrying about the future or over-planning for events that may not happen is rarely productive.

So, How Can We Live in the Present?

This is not as easy as it seems, and in fact is the toughest thing one can do.

And by "living in the present" I do not mean living for the mere moment, as a homeless person or drug addict does, caring only about the next high. Rather, what I mean is often the opposite.

The over-used slogan "Seize the Day" (Carpe Diem) now appearing on a t-shirt or bumper sticker near you, perhaps best expresses the idea. (Ironically, many of the folks I see bearing this slogan are often living deeply in the past).

Living in the present means taking action in the present and enjoying things in the here and now. And ENJOYING the here and now is part of it. While driving to the store might not seem like an enjoyable task, or doing some piece of work might not seem like fun, it is possible to extract enjoyment from such things. And cumulatively, such enjoyment adds up to a lot of pleasure in life. Finishing things and getting work done is often more pleasurable that brief moments of intoxication or thrills.

This does take a lot of effort, however. And for most Americans, it goes against an entire way of life - often touted on television or in popular culture.

"Everybody's working for the weekend," a popular (and horribly bad) rock song proclaims. This phrase neatly sums up the phenomenon of Future living. The here and now is some onerous awful and boring task that must be accomplished only for the sake of a brief weekend of thrills and intoxication. Most of us live like this. It is a hard cycle to break.

My Father used to promote this theory as well. "In life, you have to do things you don't necessarily want to do" he said, "I have to get up and go to work every morning, and most of the time I don't want to go!" He had an enviable job as a manager of a small factory. The lack of joy in his work probably reflected on his work. The factory eventually closed and was bulldozed to the ground. He found no joy in his work.

Why did he did this? He felt he had to work for a future self. He was sacrificing the here-and-now for some future Valhalla. He worked at a job he hated so he could have a house than impressed his friends and satisfied the social needs of his wife. He scrimped and saved to put his kids through college so they would become successful props in his social standing.

Not surprisingly, this daily grind eventually got to him. Having all the joy sucked out of the here and now left him wondering what the point was. When a younger woman propositioned him to enjoy the here-and-now, he found it hard to resist.

If you find yourself living in a present not of your own liking, then change it. Put pride in the trash can and re-think your life and start over. I've seen people work their fingers to the bone in jobs they hate, only so they can have status items to impress others.

This is not to say you should just chuck all your plans, cash in your 401(k) and buy a mountain of crack.   If you think this is what I have been saying, you are not listening very carefully.   Planning for the future and setting aside money for the future is a task you accomplish in the here and now.   And having money in the bank and an assured future is one thing that makes the Now more enjoyable.   You can enjoy the Now if your future is assured.

In my own life, I saw this happening, and decided to change things. Working hard to have "things" is a false logic. It is important to save for and plan for the future. However, if you are unhappy in the present, chances are, you may never make it to that longed-for future happiness.

I found myself falling into the typical trap of owning "things" - or letting things own me. It is a natural reaction, in this culture, to want things, as having things is touted on television as the greatest goal one can have. But once you own things, the allure of them fades quickly.

As I get older, I find myself wanting to do things rather than own things. And unfortunately owning things tends to get in the way of doing things, or living in the now.

Enjoying the moment is just as important as planning for the future. And pining for the past has no profit in it whatsoever.

Friday, August 28, 2009

When do you drop Collision and Comp?

Many people worry that a collision like this could cost them a lot of money or cause them to lose a "major asset".  But an older economy car is hardly a major asset, and certainly not worth paying thousands of dollars for collision coverage.

If you keep a car any length of time (as you should, if you want to save a LOT of money) there comes a decision point where you need to decide whether to drop collision and comprehensive insurance. For many people, this is an agonizing decision, as they do not want to risk losing a car in the event of an accident.

However, like most financial decisions, you have to rely more on logic than fear to arrive at a proper decision. And like most financial decisions, the rewards go to the careful risk-taker and rarely to those who "play it safe".

What is Collision and Comp, anyway?

While this may seem like an obvious question, it helps to know what you are paying for in the first place.

Collision insurance pays for repairs to your car for any accident which you are at fault. The insurance company will pay for repairs, up to the blue book value of the car, minus the deductible.

The key words here are Blue Book Value and deductible. If you wreck your car, the insurance company is not going to buy you a brand new car. They merely are going to send you (or your repair shop) a check for the damages, minus your deductible.

If the car is older, in many instances, the repair costs of even a minor collision can exceed the value of the car. For a 10-year-old car worth maybe $5000, the most you will get paid out is $4500, if you have a $500 deductible.

However, if you are in an accident and the other fellow is at fault, his insurance company pays for the damage to your car, with no deductible applied. If you drop collision insurance from your policy, you are not totally unprotected from accidents, provided you are not at fault.

Comprehensive works the same way, but for damage caused by storms, hail, falling tree limbs, garage fires, car fires, theft, and the like. Again, they will only pay out up to the value of the car, minus the deductible.

Some comprehensive plans have a "glass coverage" option that will pay to replace or repair broken, cracked, or chipped windshields (the latter generally being repaired) with no deductible whatsoever. These can be handy, as in many instances, a glass company will come to your place of work or home, replace a broken windshield, and bill the insurance company directly.

UPDATE:  Some companies, such as GEICO will repair rock chips in windshields free of charge, even if you don't have comprehensive coverage.  I got a free repair from GEICO this way!

Whether or not such glass coverage is of value to you depends on your risk adverseness, as we shall see below. Windshields are pretty cheap, and if you get out of the habit of tailgating dump trucks filled with rocks, they rarely break.

So What is the Value of These Policies?

That is the first question to ask. Bear in mind that, with few exceptions, the policies pay out book value only as a maximum limit. If your car is customized or enhanced, it makes no difference in the payout. Many a young person has found out the hard way that his $2000 stereo is not covered by his insurance policy unless declared at the get-go.

When a car is new and worth tens of thousands of dollars, it makes sense to insure it. And oftentimes, if you borrow money to buy the car, insurance is required. But as the car ages, the value of the policy declines as well. It is a declining value policy, just like mortgage insurance.

Determining the value of any policy is the first step in determining whether it is a worthwhile bargain.

To start, check the "blue book" value of your car on, and Be realistic on mileage and condition. Chances are, your insurance company is not going to give you the top dollar figure from these three "book" values, but something closer to trade-in or private party sale.

Once we have a book value, we know the dollar value amount of the policy. Bear in mind that these book values decline over time, and during even one given year, they can decline precipitously.

Next, What is the Cost of these Policies?

This is the easy part, although many insurance companies try to play "hide the main idea" here by presenting confusing documentation or not itemizing each element of the policy. Others, such as GEICO, let you review each dollar cost coverage online.

Take the cost of Collision and Comprehensive insurance for the vehicle in question and double it, if the premiums are calculated on a bi-annual basis. Now you have an annual cost and the value of the policy.

Next, Assess Your Real Risk

Most folks are not very good at risk assessment. They view fairly risk-free transactions (like an airplane flight) as a risky venture, and yet view far riskier actions (driving to the airport) with little concern. We tend to be concerned about protecting our expensive, shiny car parked in the driveway (worth maybe $20,000) but not our open-ended liabilities (which can run in the millions) if, for example, we run someone over.

Often, what is parked in your driveway is not your most expensive asset. If it is, then your finances are seriously awry.

Determining your actual risk for an accident is difficult, but not impossible.

On average, the average American motorist gets into an accident every 11 years. And by accident, this could mean anything from a fender-bender to a complete totaling of your car.

Statistics like this can be misleading, as they lump in the experiences of all people, of all ages, and at all locations. Thus, for example, if you are 18 years old, and driving a Mustang in an urban area, your chances of an accident are far higher than for a 67-year-old retired farmer driving a pickup truck in rural Montana.

For the young person, the math is simple. If they have a new car, chances are, they are required to have collision and comp, as they have a loan. If they have an older car, chances are they drop the coverage because it is so unaffordable.

But for older people, the calculation is more complex. For older cars, the cost of collision and comprehensive seems cheap, so why bother dropping it? However, if the risk of collision or damage is slight and the value of the car is low, even a policy that costs "only a few hundred" is no bargain.

There are a number of other factors in assessing your risk:

1. Where you live - city or country?
2. Do you garage your car?
3. Miles driven annually
4. Driving style - fast and aggressive, or slower and more cautious?
5. Risk of theft - which often depends more on make and model of the car.

Now, do the Math

Once you have this data in place, you can do a simple mathematical analysis and come to a reasonable conclusion.

Let's take for example one of my 1997 BMW convertibles. According to KBB, which is the highest of the three, this car has a retail value of about $10,000 on a good day. And that's probably an inflated value. By the end of next year, this value could be less.

My insurance company wanted about $60 for collision on this car and another $70 for comprehensive. That's for six months. So for each year, I am paying $260 for coverage of vehicle damage. The deductible on this policy was $1000 (hint: You can cut the cost of collision and comp if you increase your deductible as high as possible).

At first glance, this seems like a bargain. Only a couple of hundred bucks for nearly $10,000 in coverage! And if you plan on wrecking your car, this is probably a good bargain. But most of us don't plan on that. And with the deductible, the maximum payout would be, at most, maybe $9,000.

Over the 11 year "average" time between accidents, that comes out to $2860 in premiums. So if you are an average driver, over an 11 year period, you will pay out nearly 1/3 the value of the car in premiums. To many, this still seems like a "bargain".

If you put this in terms of a bet, though, would you take it? Suppose I offered to pay you $9000 if you rolled a 1 or 6 on a dice, and you made a bet of $3,000. Odds are, for every throw, you'd have a 1-in-3 chance of winning. While you might get lucky on a first roll, if you played long enough, the best you can hope for is to break even, as the odds (1-in-3) neatly mirror the payout (3-to-1).

And this example scenario is not by accident, either. Insurance companies figure their premiums based on actuarial tables, and then factor in a profit factor. So the "odds" in this case are about right. The cost of the premium is about equal to the risk of payout, with a little more thrown in for profit.

In my example, the insurance company believes that the odds of me having an accident are far less than once in 11 years, or that the payout will be a lot less. Why is this?

Well, for starters, I am not an 18-year-old with a Camaro. My driving style is older and more sedate. Older drivers, having been in or seen many horrific accidents, tend to drive more conservatively and defensively. So the 1-in-11 years odds are probably longer for me.

Second, not every accident totals a car. Most are fender-benders that can be repaired cheaply. And insurance companies are quick to recommend repair outlets that can do the work fast and cheap. So the odds of them paying out the full $9000 are even less.

Third, I drive this car maybe 3,000 miles a year. That is not a lot. The average American drives maybe 15,000 miles a year or more. So if you factor in the lower mileage, my risk factor jumps by a factor of five.

Fourth, I live in an area where the car is not likely to be stolen or damaged or in an accident. The biggest risk I face is a deer collision, which while costly, rarely totals a car. A car such as this, with a fairly sophisticated anti-theft system, is not a favorite of amateur thieves (teenagers) who prefer easier-to-steal cars from the 1980s and early 1990s.

If we take all this into account, the odds of an accident or payout probably jump to once in 20 years or maybe 30. At that rate, the value of the policy exceeds the book value, clearly, and is no bargain.

But, Can You Afford the Risk?

There is one other factor in any risk assessment and that is your risk adverseness. For me, this is one of five cars that I own. If it is stolen or damaged beyond repair, I can simply walk away from it and drive another car.

On the other hand, if I have to pay collision and comprehensive on all five cars, I can't afford to keep them. To me, $10,000 is not a huge amount of money, and I can afford to take a risk on it, with the reward being the $2860 in savings on insurance over a decade (A payout of 28.6% over 11 years is not a bad rate of return, either).

For others, to whom $10,000 represents the most expensive asset they own, such a risk may not be practical. And of course, if you drive in a congested city, for 15,000 miles a year, your risk factors may be much higher. However, if the cost of your car is so dear to you that you cannot afford to risk losing it, I would suggest that perhaps you are owning too much car for your income level.

There are other, ancillary factors as well. If a car is damaged in a collision, and insurance is paying, most consumers take the car to the most costly body shop for a top-flight repair. However, if your car is uninsured, you may be more inclined to shop around on price or even make repairs yourself. As it is a used car, there is no point it throwing mountains of money at it.

If your fender is dented, it may be a lot cheaper to simply buy a used fender from a junked car and bolt it on and have it repainted, than to spend thousands of dollars having the dealer install a new fender. By taking control of your own life and being willing to take responsibility when things happen, you can save even more.

So Should You Consider Dropping Collision and/or Comp?

There is no clear Yes or No answer here, as each person's situation is different. However, there are some factors to consider after doing the risk analysis above:

1. Is your car over 7 years old?

2. Is your car worth less than $10,000?

3. If you lost the car entirely, could you recover from the loss readily?

If you can answer YES to all three of these, then you might want to consider dropping Collision and Comp.

For my situation, "doing the math" resulted in saving about $1470 a year in collision and comp premiums on all five cars. About half the cost of my car insurance was in Collision and Comp. Over a decade, this would amount to $14,700, or more than the cost of any one car. The odds of me totaling more than one car over this time period are pretty slim.

Is there risk involved? Yes, but a calculated risk. In any financial situation, the rewards rarely go to the risk-averse. While there is a probability that I might wreck a car and come out "behind" on the deal, there is a certainty that if I pay nearly $1500 a year for ten years, I will definitely come out $15,000 poorer at the end (at worst) and maybe a break even (at best).

You can bet I'll be driving more carefully from now on.....

Thursday, August 13, 2009

TANSTAAFL! There Ain't No Such Thing As A Free Lunch!

Robert A. Heinlein used the term TANSTAAFL in many of his Science Fiction novels to describe the concept of "There Ain't No Such Thing As A Free Lunch!" in shorthand. It is a sound principle to apply, but many folks fail to grasp this simple economic theory.

What do people mean when they say, "There ain't no such thing as a free lunch?"   It is a puzzling expression to many folks today.   But historically, free lunches were used as a means of tricking people into spending more money than they intended to.   And of course, these "free lunches" weren't free.

A Brief History of "FREE LUNCH"

Back in turn of the last Century, many working people in major cities such as New York would break for lunch at a local bar or tavern, and have a beer and a sandwich as a noontime meal. Competition among bars became fierce, and in short order, many were offering discounts on food, hoping to attract more of the lunchtime crowd.

This marketing trend culminated in the FREE LUNCH offers. Photos from the era show bars with large FREE LUNCH signs prominently displayed in the windows. If patrons would buy a beer or two, they were entitled to a free lunch. A great deal - or so it seemed.

A free lunch of sausages didn't cost the barkeep much, and since patrons were required to buy a beer, the cost of the lunch was simply folded into the cost of the beer, which in this cartoon is rather large!

In reality, the lunch was not free. To begin with, the bar usually required the patron to purchase a beer to obtain the lunch.  And even if such a purchase was not required, the wait time to get the "free" lunch was so long that most thirsty patrons would order one.  As you might expect, the cost of the "free lunch" was folded into the serving price of the beer.

Bar owners also knew that lunch hours were short, so that by carefully controlling the amount of food served to patrons, they could be certain that most would still leave hungry, as they had to return to their jobs by a certain hour.  So delays in serving food often worked to the bar owner's advantage.

Modern Usage of "FREE LUNCH"

People quickly realized that the "Free" lunch offered by these bars was anything but free. The cost of the lunch was simply folded into inflated beer prices, and the resulting "lunch" was often stingy and small. The term "Free Lunch" quickly evolved into a term for any come-on or other "deal" which turns out not to be such a deal after all.

But as used by Heinlein and others, the term takes on a more profound meaning. As applied as a market theory, TANSTAAFL is much more than a de-bunking of come-ons and promotions.  Rather, this term defines a basic theory of economics - that every good and service in the economy must be paid for by some party at some time, and that nothing is, in reality, "Free" at all and can never be.

In other words, everything in our economy has a cost, and that cost must be borne by some party somewhere in the economic chain.  We cannot create wealth from nothing, nor can we spend money that we do not have.  While this seems axiomatic, it is surprising not only how ordinary people believe in the free lunch, but also how many government workers and politicians believe in it as well.

Many folks want to believe they can get something for nothing. They like ideas such as the "100 mpg carburetor" - that the oil companies are supposedly suppressing.   Or perpetual motion.  They like the idea of wealth without labor, of violating the law of conservation of energy. In short, they want something for nothing.  And it is this attitude that gets them into trouble.

The term TANSTAAFL also boils down to the concept that "The more complicated you can make a financial transaction, the easier it is to fleece the marks."

Taking our original FREE LUNCH concept as an example, most people would not go into a restaurant if they were told what the overall cost and portions would be, as set up by the bars offering "Free Lunch". Most consumers would say "that is no bargain. For the amount and quality of food served, the price is too high!"

But few consumers actually do this, as they are not presented with that apparent choice. What they perceive as the choice is something for "Free" and, oh by the way, you have to buy a $10 beer to get it. Dangle the word "Free" in front of most consumers, and they salivate like Pavlov's dogs.

The concept of FREE LUNCH played upon the irrational emotional belief that you can get something-for-nothing. And by making the financial transaction complicated and indirect (adding the food cost to the liquor bill and making the food 'free') most consumers were not even aware they were being fleeced. "Hey, I got a FREE LUNCH out of the deal - I came out ahead!" they would say.

The best cons in the world are where the Mark believes that he is getting away with something.

Are You Falling for Free Lunch?

The concept of the Free Lunch is alive and well today, and you may be falling for it without even knowing it. In fact, as noted above, when the FREE LUNCH concept is properly applied by marketers, the consumer (the mark) doesn't even know he's been had.

Think you are savvy enough to avoid the FREE LUNCH trap?  Well, in the last few years, have you leased a car, mailed in a rebate coupon, used airline miles, or participated in some sort of 'buyer loyalty' program?  If so, chances are, you fell for the "Free Lunch" gambit.

Car Leasing - the Big Free Lunch that Costs a Lot!

Leasing a car, as I have noted before, is one of the most expensive ways to go about owning a car.  Many consumers labor under the misconception that they do not own the car, but are renting it.  But a lease really is just an agreement to sell you a car and then buy it back later on - on very unfavorable terms.

Leasing deals are horribly complex, and the basic terms of the deal, such as the purchase price, resale price, and interest rate, are often buried in the documents or glossed over by salesmen who sell the consumer on "monthly payment".

The "FREE LUNCH" or something-for-nothing idea in leasing is the concept that you can have "more car" for a "lower monthly payment."  The reality is, by ignoring actual cost of ownership, the consumer ends up paying the highest price possible for transportation - and this is before we factor in things on the "back end" such as excess mileage and "wear and tear" on trade-in.

But I've argued with many a consumer who has had that glossy, wild-eyed look in their face, convinced they are getting a "great deal" by purchasing "only that part of the car they want" - the horrible initial depreciation.  You can't reason with a raging true-believer.

Now granted, every ONCE IN A WHILE, someone comes out ahead in a leasing deal.  Just as once in a while, someone sneaks in to a bar and cadges a FREE LUNCH without buying the requisite $10 beer. But it doesn't happen often, and it won't happen to you, and figuring on it happening is a sure way to go broke.

Airline Miles - Free Lunch for twice the cost!

Airline miles are another area where the concept of "Free Lunch" has been taken to an extreme. Originally, airline miles were used as a way to get passengers to book on a particular airline.  Back in the 1960's and 1970's, before deregulation, most airplanes flew half-full (or half-empty, if you are a pessimist).  So giving away empty seats literally cost the airline little or nothing.

And since air travel was so prohibitively expensive, most travelers were businessmen traveling on business.  They had a choice in airlines, but the cost of the ticket was paid by their employer.  If they could specify which airline, they could reap the reward in terms of airline miles, which could later be used for a family vacation.

And mileage rewards were generous, too.  It only took a few flights to obtain a "free" flight anywhere in the USA.  Like I said, those empty seats cost the airline nothing, so they gave them away to get the paying customers.

The Government and many businesses tried to cut back on this trend, by forcing employees to turn over their miles to the government or business. These miles were outright bribes, frankly, and the government had every right to insist they be turned over.  The IRS even explored taxing these as income.

But the motivation to do these things waned as deregulation shook up the airline industry.  One of the first things to suffer was the airline miles programs. Overnight, the number of miles needed to get a "free" flight was doubled, and then doubled again.  Then other, little things were added to chip away at this "free" item.  Miles would expire if not used.  Fees were charged for redeeming miles for tickets.  And most importantly, severe restrictions were applied to prevent you from actually using the miles in an really useful way.

At the same time, airline miles were marketed to other parties as an incentive for credit card companies and other merchants unrelated to the airline industry.  Airline miles were no longer the carrot used to lure the business traveler, but rather a come-on to sell credit cards and other services.

Airline miles were never "Free" - even back in the golden heyday of the 1970's.  Your employer paid for them in most cases.  And even if you were buying your own tickets, the "free" miles were folded into the cost of the ticket itself.  Nothing is free.

Today, they are even less free.  Credit card companies buy miles from airlines and then charge merchants who process the credit card transactions an extra fee. VISA in particular, has been "sticking it" to merchants as of late, charging rather steep fees for processing credit cards that use airline miles.  Problem is, merchants have no way in advance of telling whether the card used is a "rewards" card, so they are stuck with the expense, which in turn is folded into the cost of doing business.  In other words, we all pay for it.  Nothing is free.

And airlines no longer have all those empty seats to give away.  Full flights are the norm today (and so are low airfares).  So the severe restrictions on using miles to buy tickets were implemented to prevent people from taking up salable seats.

Upgrades are pushed as the best way to use airline miles.  Oftentimes seats in first class remain unsold, and offering a "miles" customer a seat up front in exchange for miles is a neat way to give away something that was unsold anyway - and free up a seat in coach for another paying customer.

Note also that most "miles" credit cards charge exorbitant rates - 20% or more.  While you may have the discipline to "pay off the balance every month" nearly 70% of credit card users do not (and most lie about it rather than admit the painful truth).  And even if you pay off your balance every month, most charge annual fees of $100 or more.

So what is the alternative?  Well, for the casual flier (and even business flier today) the use of airline miles makes little or no sense.  Since these miles "expire" over time, unless you really fly a LOT, you will not end up accumulating enough miles for an upgrade or free ticket.  So the best strategy is to shop for airline seats based on cash cost, not on loyalty to a particular airline.

If you find yourself flying the same airline a lot, then sure, it makes "sense" to enroll in the loyalty program.  Chances are, however, that you'll use those miles for upgrades to first class.  The restrictions and limitations on free tickets are so severe that it is nearly impossible to use them.

For credit cards and other services offering "free miles" I would suggest walking away. You pay for these miles in higher interest rates.  And if you end up carrying a balance for even a few months at 22% interest, well, you've paid for your "free miles" many times over.  Shop for a credit card based on lowest price - lowest interest rate, no fees, etc.

Again, when a simple financial transaction (buying an airplane ticket, borrowing money) can be made complex, the overall real price can be better obscured to the consumer.  That is the whole idea behind FREE LUNCH.  Make the "mark" think he is getting something for free, when in fact he is paying nearly twice as much for it.  It is a neat trick.

Rebates, Coupons, and Other Rewards Programs

The rebate is the most curious financial instrument devised by man.  If you are like me, you wonder "why not just lower the price?  That would be so much simpler!"  But of course, simplicity is not to the advantage of the marketer.  The rebate makes a simple financial transaction more complicated, and thus the real cost can be obscured.

For many folks the idea of something-for-nothing has such a powerful hold that they cannot shake it - ever.  So you offer a "rebate" and they buy.  Nearly 70% of people buying products with rebates never bother to fill out the forms and mail them in.  And of the those who do mail them in, many never receive the rebate because of alleged "errors" in the paperwork.  Since the rebate checks are mailed out months afterwords, many consumers completely lose track of the transaction and never realize they never received their rebate - or care, for that matter.

Rebates can be costly as well.  For example, one fellow purchased a generator with a $100 rebate.  He mailed in the coupon and the original UPC code which he cut off the shipping carton.  He found out later on that the generator didn't work.  Well, with the UPC missing from the carton, he could not return it to the store for a full refund.  His only recourse was under the warranty, which had expired.

Other rebates require such onerous paperwork requirements as to never be practical.  A $4 rebate on a bottle of Vodka, for example, requires the consumer to soak off the label and mail it in.  How many consumers want to serve their guests in label-less bottles - or have the time and inclination to soak off a label, fill out a form and spend 43 cents on a stamp for a measly four bucks?  Not many, to be sure.

Couponing is another area where the dangled "FREE" tends to blind consumers.  Coupons are not a bad deal if they offer a discount on a product you intended to buy all along.  But in many instances, consumers change their buying preferences based on coupon availability.  And oftentimes, the "brand name" item, even with the coupon discount, is more costly than "store brand."  On average, you'll come out ahead buying store brands or being more price conscious, than spending hours clipping coupons.

Back in the day of "double coupons", they were a great deal.  And a savvy consumer who obtained the coveted manufacturer's coupons, could literally go out the checkout paying little or nothing for groceries, on occasion.  However, such stunts were just that - stunts - and often performed before television cameras to sell consumers on the idea of couponing.

Again, nothing in life is "Free" and the cost of coupons is folded into the cost of the other groceries you are buying.  And since in many instances, a "brand name" product with a coupon is still more costly than the store brand, the savings are illusory.  In many instances, the company is still making a profit with the coupon - and often the cost of the coupon is factored in.

"Instant" coupons are an extreme example of this idea.  Why bother to price an item and then attach an "instant coupon" to it to lower the price 50 cents?  Again, the idea is to dangle that word "FREE" in front of you, so you won't notice that the competitor's product is actually a better deal.

Rewards programs work the same way.  The local boating store offers "rewards coupons" if I buy a certain amount of merchandise every month.  Rather than just lower my bill by the same amount, they proffer these coupons instead.  On more than one occasion, I've let a coupon expire, because I had nothing I needed to buy there.  On many more occasions, I've gone back to the store to "buy things" because a coupon was about to expire.  The $25 coupon gets you in the store, where you spend $100 on stuff.  While it may seem like you are getting $25 for "free", you are paying for it in terms of the inflated cost of other goods.  And if you are buying things you don't really need.... well, where's the savings in that?

A better deal is to find the things you want at the lowest possible price - which often means online or at a competing store.  Of course, if you find yourself having to buy a lot of products at a particular store (for business, for example) then it makes sense to sign up for these programs.  But as with the airline miles, oftentimes these "rewards" are kick-backs to people purchasing items for their employers.  The secretary who buys office supplies for the company at the supply store is certain to cash in those "rewards" coupons on things for herself (which is one reason these supply stores carry more and more non-office supply items.  A secretary has no need for another stapler at home).

Cash For Clunkers - Government FREE LUNCH

The reality is that you probably can't avoid FREE LUNCH entirely these days, as every financial deal, it seems, has some sort of "freebie" worked into it, and unless you can work that coupon or rebate, you can't get the best deal.  In some instances, you have to hold your nose and play these games.

But often, if you look hard and crank the numbers, it turns out the FREE LUNCH is not such a bargain after all.  For example, the CARS (so-called "Cash for Clunkers") rebate of $4500 sounds like a heck of a deal, until you break down the actual costs involved.

To begin with, they are not giving the money away.  You have to turn in a working car that has been registered and insured (by you) for the last year.  Even the cheapest running car is worth maybe $500, so the $4500 "rebate" is really at most $4000.  If your car is worth more than that, well, then the rebate is worth accordingly less.

For example, I have a 15-year-old pickup truck worth maybe $3000 on a good day.  Is "cash for clunkers" a good idea for me?  Well, the actual value to me is only $1500, as I would have to turn in a $3000 car to get the rebate.

UPDATED June 2015

And yes, some manufacturers are offering to "match" the rebate.  But in order to do so, no other offers can be applied, and the "match" comes off the sticker price.  Most new cars are horribly overpriced on their sticker, and you can easily talk down a dealer $4500 without trying.  So this "matching" is not really such a deal after all.

And finally, in order to trade in your clunker, you have to buy a new car with higher gas mileage.  So if I wanted a replacement pickup truck, well, I'd be stuck with a Ford Ranger or some small truck that would not pull my trailer.

A better deal, as in the past, would be to sell my existing truck through Autotrader and then buy a late model low mileage used truck. The overall cost would still be less, even without the $4500 "cash for clunkers" rebate.

The news stories are full of how people traded in their gas guzzler and "got a new PT Cruiser for only $9000!" But if you think about it, they paid over $10,000 for that car by trading in a $1500 "clunker." And the resale value on a PT Cruiser is not very high ($6000 to $10000).  So in effect, they ended up getting very little of a "bargain" at all.

TANSTAAFL! - There Ain't No Such Thing As A Free Lunch!